Spanking brand new. By popular demand, this comprehensive “Secondary Offerings Handbook” covers the entire terrain, from the basics to how to deal with selling shareholders. This one is a real gem – 23 pages of practical guidance – and its posted in our “Secondary Offerings” Practice Area.
Smaller Reporting Companies: Some Stats
Recently, the SEC’s “Office of the Small Business Advocate” – which covers emerging, privately-held companies up to small public companies – released its inaugural Annual Report. Stats for smaller reporting companies begin on page 24 – here’s the main takeaways:
– The pre-exit holding period for a company in a PE or VC portfolio is now 6-7 years – so companies are choosing to enter the public markets after maturing beyond the smaller reporting company thresholds
– Average proceeds for small company IPOs & other registered offerings were $47 million last year
– 61% of small exchange-traded companies have no research coverage
The SEC also recently announced that it had published the report of findings from its Annual Small Business Forum. See this blog for a summary of the recommendations & SEC responses.
Cybersecurity: COSO’s New Guidance
Here’s 32 pages of new guidance from COSO – in partnership with Deloitte – that’s intended to help boards, audit committees and executives comply with COSO’s ERM Framework to protect companies against cyber attacks. This “Accounting Today” article gives an overview of how these resources work together:
COSO’s ERM Framework was updated in 2017 to spotlight the importance of applying ERM throughout an organization, particularly in strategic planning. One of the main drivers behind the 2017 update was to address the need for organizations to improve their approach in managing cyber risks. The new guidance aims to provide context on the fundamental concepts of cyber risk management to help organizations leverage their existing technical cybersecurity frameworks.
What will 2020 hold for BlackRock? Last year at this time, environmental activists were pegged as the pranksters behind a phony annual letter from BlackRock’s Larry Fink. Maybe we’ll see more of that “creativity” again this year (in the last few months, the asset manager has also faced protests as well as scrutiny from Al Gore). But for now – despite some reports that BlackRock’s shareholders have been appeased by its increased disclosure about engagements – a couple of proponents are revisiting the more traditional type of pressure for “walking the talk” on E&S issues. This Reuters article suggests that BlackRock may press companies harder this year as a result.
First, Mercy Investment Services (the asset management arm for the 9000 nuns of “Sisters of Mercy of the Americas”) filed this resolution:
Proposal requesting that the Board of Directors initiate a review assessing BlackRock’s 2019 proxy voting record and evaluate the company’s proxy voting policies and guiding criteria related to climate change, including any recommended future changes. A summary report on this review and its findings shall be made available to shareholders and be prepared at reasonable cost, omitting proprietary information.
This Guardian article provides some details on the supporting statement – e.g. BlackRock supported only 6 of 52 climate-related resolutions last year, according to the nuns. Meanwhile, As You Sow is questioning BlackRock’s commitment to “stakeholders” – with this resolution:
BE IT RESOLVED: Shareholders request our Board prepare a report based on a review of the BRT Statement of the Purpose of a Corporation signed by our Chairman and Chief Executive Officer and provide the boards perspective regarding how our Companys governance and management systems should be altered to fully implement the Statement of Purpose.
According to this Cooley blog, the proponent takes issue with BlackRock’s tendency to support management and vote against E&S shareholder proposals. The blog summarizes the “stakeholder” pressures that other companies are also facing – including calls for a reduced gap between CEO and worker pay.
Critical Audit Matters: What’s Your Auditor’s Average?
If you’re looking for “CAM” stats to share with your audit committee, check out the “CAM Counts by Auditor” available in this Audit Analytics blog (as well as the data from this earlier blog).
Right now, KPMG leads the way in terms of count – with 52 CAMs disclosed within the audit reports of 22 companies – averaging 2.4 CAMs per opinion. This is one area where being “below average” could provide some reassurance to directors.
A Fond Farewell To Broc
Many of us are still coming to terms with the fact that Tuesday was Broc’s last day as an Editor here at TheCorporateCounsel.net. Words aren’t adequate to express how much I’ve learned from him and how grateful I am for his mentorship. Here’s what I posted on LinkedIn last month (and also check out this well-stated DealLawyers.com blog from John):
Over the last 17 years, Broc has worked around the clock to make securities law & corporate governance accessible – and even entertaining! – to *everyone* in our community. Truth be told, I was star struck when I first met the human behind the guidance that I relied on every day, and was thrilled to be invited to the first “Women’s 100” Conference seven years ago. And although I loved private practice, when Broc suggested that I join him, John and the rest of the team here – and train to be his eventual successor – I couldn’t believe my luck.
Thank you, Broc, for giving me the opportunity and for teaching me so much over my career – especially during these last few years. Not just about the law, but about valuing people, embracing creativity and being unafraid to jump into new adventures. I’ll miss your daily presence but look forward to carrying on what you’ve been building.
For more details about what things will look like around here in the coming months and years, see our press release. Like Broc, I’m always open to suggestions, so feel free to email me any time at liz@thecorporatecounsel.net. I appreciate everyone who’s reached out so far!
John blogged a few months ago that 70% of restatements are now “Little r” revisions, according to data from Audit Analytics. This WSJ article reports on a couple of studies that analyze the potential connection between the presence of clawback provisions & performance awards, on the one hand, and management’s discretion to “restate” versus “revise” financials, on the other. Here’s an excerpt (also see earlier work from Francine McKenna, which the study cites, and CLS “Blue Sky” blog):
A study by Ms. Thompson found that almost half—45%—of Little r revisions from August 2004 through 2015 that she analyzed met at least one of the guidelines for them to be considered Big R restatements.
Her research points to one potential motivation: “clawbacks” that allow companies to recoup compensation from executives in the event of a Big R restatement. Companies with such clawbacks were more than twice as likely as others to use revisions for potentially material errors, her analysis found.
Although the article tries to also draw a link between “Little r” revisions and performance awards, the data doesn’t directly connect declines in performance award metrics like EPS to a company’s decision to carry out a “Big R” restatement versus a “Little r” revision. The article points out that in at least one situation, Corp Fin was deferential to a company’s decision to correct an accounting error via a revision even though the error had flipped one quarter’s earnings per share from negative to positive and the company used an annual EPS metric in its long-term incentive plan.
Also see this article suggesting that executives who are subject to clawback policies are more likely to push for tax savings – e.g. through use of tax havens. It wouldn’t seem there’s much downside to that for shareholders, but for companies that follow GRI Sustainability Reporting Standards, it’s relevant to know that GRI is recently announced a new “tax disclosure standard” to promote transparency of tax practices that could impact funding of government services & sustainability initiatives.
Corporate Governance Ratings: Internal Audit Enters The Game
Recently, the Institute of Internal Auditors announced a new “corporate governance index” that annually rates listed companies – based on surveys of Chief Audit Execs. Here are the results of the inaugural review.
While I’m not sure I can get behind the claim that this is “the first to truly probe – and grade – core actions and responsibilities that are crucial to successful, ethical, and sustainable organizational practices among American businesses,” it’s somewhat unique in highlighting auditors’ views (see page 7 for a take on that group’s role in corporate governance). Since my mom spent most of her career as an internal auditor, I can attest that these folks often have different perspectives & opinions than those of us on the legal side.
But don’t take my word for it! This note accompanies the finding that companies are vulnerable to corporate governance weaknesses because they have no formal monitoring or evaluation mechanism (which incidentally is the category of “worst performance”):
CAEs also reported that, if the evaluation is not conducted by internal audit, it is most often done by the general counsel’s office or under the direction of the nominating/governance committee, at which point it is more likely to be a compliance “check-the-box” exercise relative to listing exchange requirements and other laws and regulations.
Anyway, the surveyed companies averaged a “C+” grade and the report is pretty emphatic that there’s room for improvement (with all due respect to my auditor friends, if there’s anyone more “glass half empty” than us lawyers, my money is on CAEs). The grading is based on eight “Guiding Principles of Corporate Governance” – and helpfully, you can see the actual survey questions and the overall grade that each question generated. Here’s a finding that we can probably all agree is troubling:
When presented with specific scenarios in which the CEO wants to delay reporting negative news, respondents believed that only 64% of board members at their company would push back on the CEO, meaning more than one-third (36%) of board members would not. Similarly, CAEs gave a D (67) to the issue that board members should be asking whether information presented to them is accurate and complete.
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the SEC announced this New Year’s gift: proposed amendments to Rule 2-01 of Reg S-X that would “modernize” the auditor independence rules and codify Staff consultations – which have been influencing how the rules are interpreted since they were adopted in 2000 and last amended in 2003. If adopted, the proposed amendments would:
– Amend the definitions of affiliate of the audit client, in Rule 2-01(f)(4), and Investment Company Complex, in Rule 2-01(f)(14), to address certain affiliate relationships, including entities under common control
– Amend the definition of the audit and professional engagement period, specifically Rule 2-01(f)(5)(iii), to shorten the look-back period, for domestic first time filers in assessing compliance with the independence requirements
– Amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships
– Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence
– Replace the outdated transition and grandfathering provision in Rule 2-01(e) with a new Rule 2-01(e) to introduce a transition framework to address inadvertent independence violations that only arise as a result of merger and acquisition transactions
– Make certain miscellaneous updates
The announcement runs through a couple of hypos that show how the proposal would address interpretive issues that have been popping up. As always, there’ll be a 60-day comment period that runs from when the proposing release is published in the Federal Register. Also see the summary in this Cooley blog…
Audit Committee Role & Reminders: Statement from SEC & Corp Fin
Also yesterday, this statement from SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and Corp Fin Director Bill Hinman was issued to remind audit committees of their oversight responsibilities in financial reporting – and to remind companies that audit committees need adequate resources & support to fulfill their obligations. Here’s an excerpt:
– Non-GAAP Measures – Non-GAAP measures and other metrics used to gauge company performance, when used appropriately in combination with GAAP measures, can provide decision-useful information to investors on the company’s performance from management’s perspective. It is important that audit committees understand whether—and how and why—management uses non-GAAP measures and performance metrics, and how those measures are used in addition to GAAP financial statements in the company’s financial reporting and in connection with internal decision making. We encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.
– Reference Rate Reform (LIBOR) – The expected discontinuation of LIBOR could have a significant impact on financial markets and may present a material risk for many companies. The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate, a process often referred to as reference rate reform, is not completed in a timely manner. We encourage audit committees to understand management’s plan to identify and address the risks associated with reference rate reform, and specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR.
– Critical Audit Matters – Beginning in 2019, certain public companies’ auditors are required to communicate critical audit matters (CAMs) in the auditor’s report. While the independent auditor is solely responsible for writing and communicating CAMs, we encourage audit committees to engage in a substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAM, the auditor’s basis for the determination of each CAM and how each CAM is expected to be described in the auditor’s report. In short, we would expect that the discussion of the CAM in the auditor’s report will capture and be consistent with the auditor-audit committee dialogue regarding the relevant matter. We encourage audit committees to continue their efforts to understand the new standard and remain engaged with auditors in the implementation process.
We’re Gonna Party Like It’s…
Who else is in shock that we’re 20 years into this century?! Our flip from 2019 to 2020 feels momentous in its own right – but we’re lacking in catchy tunes to celebrate. When in doubt, tune to Prince:
My resolution this year is to finally visit Paisley Park…I live just down the road and I’m still kicking myself for never making it to one of “The Artist’s” impromptu parties. I did, however, join thousands of my closest friends outside First Ave the night he died, where he was honored by lots of local talent, including Lizzo before many people knew who Lizzo was – quite the scene with everyone singing along to “Purple Rain.”
Last week, the SEC issued this notice to approve changes to FINRA Rule 5110. This Mayer Brown blog gives a high-level overview of topics covered by the amendments – which are intended to reduce compliance costs:
(1) filing requirements; (2) filing requirements for shelf offerings; (3) exemptions from filing and substantive requirements; (4) underwriting compensation; (5) venture capital exceptions; (6) treatment of non-convertible or non-exchangeable debt securities and derivatives; (7) lock-up restrictions; (8) prohibited terms and arrangements; and (9) defined terms
Corporate Musicals: Ready for a Revival?
If you haven’t watched “Bathtubs Over Broadway” on Netflix, make it your New Year’s resolution. In this review for The New Yorker, Richard Brody concludes that high-budget corporate musicals like J&J’s “sunscreen disco” inspired countless “mid-level business people” to be heroes in their profession.
Is a revival of this genre the key to positive corporate culture that so many companies & shareholders say they want? For enough money, I’m pretty sure Kristin Chenoweth would sing about insurance policies, medical devices or self-driving vehicles. For some “short form” entertainment, check out Blackstone’s holiday video – 6 minutes and in the style of “The Office,” with a joke for us SEC geeks around the 4:30 mark.
Songs For Our Time
On second thought, maybe over-the-top, optimistic musicals aren’t a good fit for this day & age. What today’s workers would identify with is an album with songs like “The Perils of Mobile Connectivity” – from a derivatives trader who’s spent the best years of his life in an office tower. I’m here to report that Jason Pilling’s “White Collar Melodies” has all that & more…
We’ve blogged a lot about the BRT’s redefined “statement of corporate purpose.” Many are frustrated that the topic is getting so much attention, given that the vast majority of directors & companies already view themselves as catering to multiple stakeholders in order to achieve long-term value. I blogged recently on “The Mentor Blog” about that disconnect and the resulting communications opportunity. One tangible thing that some companies are doing – regardless of whether their CEOs signed the BRT statement – is adopting a “statement of purpose” that shows the link between the company’s strategy and its consideration of stakeholder groups.
Last week, Prudential went one step further and also announced a “multi-stakeholder framework” that supports the company’s updated statement of purpose – and shows how the board considers shareholders, employees, customers and society. The press release emphasizes the board’s role in the stakeholder commitments and says that the company will report on the progress of its purpose-driven goals in its annual & sustainability reports. Here’s the infographic:
We’ll be covering more on this issue during our January 21st webcast – “Deciphering ‘Corporate Purpose.’” Join us to hear Morrow’s John Wilcox, Freshfields Bruckhaus’ Pam Marcogliese and Morris Nichols’ Tricia Vella discuss what the debate over “shareholder primacy” means for directors’ fiduciary duties and corporate accountability, and how companies can effectively set & communicate “stakeholder” commitments.
ESG Ratings Draw Nearly Universal Contempt
If there’s one thing that most people in our community can agree on, it’s that the proliferation of “ESG” ratings and funds is causing frustration and confusion. However:
ESG scores can play a key role in determining whether fund managers or exchange-traded funds buy a stock, how much companies pay on loans, and even if a supplier bids for a contract. They can also help verify whether a bond is really “green” or if a company is eligible for a stock benchmark. Investments in about $30 trillion in assets have relied in some way on ESG ratings.
That’s according to this recent Bloomberg article, which cites an MIT working paper. But ratings are difficult to compare and can vary widely. And the variation in how they’re employed – by “ESG” funds, in particular – only compounds the problem. Maybe that’s why the SEC is reportedly looking into these investors:
The SEC initiative is based out of the agency’s Los Angeles office, according to a person familiar with the matter. It has focused on advisers’ criteria for determining an investment to be socially responsible and their methodology for applying those criteria and making investments.
One letter the SEC sent earlier this year to an investment manager with ESG offerings asked for a list of the stocks it had recommended to clients, its models for judging which companies are environmentally or socially responsible, and its best- and worst-performing ESG investments, according to a copy of the letter viewed by The Wall Street Journal. It follows a similar examination letter sent last year to other asset managers, suggesting the regulator decided to broaden its examination.
It’s not clear what the end game would be for this type of examination. Increased disclosure? A standardized reporting framework? That’s a concept I’ve blogged about for companies. The EU already requires large companies to report on their sustainability policies – and within the next couple years will also encourage indexes and benchmark providers to disclose their ESG methodologies (see this White & Case memo and this Bloomberg article).
Government Shutdown Averted!
Good news – the Staff will be returning to work later this week. Congress passed spending bills that the President has now signed, averting a shutdown and keeping the federal government funded through next September. Here’s a short CBS News article about it.
Last year around this time, the government began what ended up being the longest shutdown in history. The SEC went down to a “skeletal staff” for most of January – which put companies in a real bind when it came to negotiating with shareholder proponents, trying to get through the registration process and resolving any Corp Fin comments.
We were blogging about it almost daily (here’s one of the later ones) – and fielded many posts in our “Q&A Forum.” For a reminder about what that was like at the SEC, see Broc’s blog about the deep hole Corp Fin found itself in after the shutdown and my blog wondering whether the shutdown led to Corp Fin reconsidering the Rule 14a-8 no-action request process.
Our own Susan Reilly notes: Before she gave birth to her second son, Liz blogged about her experience balancing pregnancy, parenthood & lawyering. In that vein, I thought I’d share a little about my life as a part-time, work-from-home securities lawyer and mom of three boisterous little boys. I’ve had this job for nearly 6 years now – and here are 5 things I’ve learned:
1. Set deadlines for yourself – The work I do now is dangerously flexible – most of my writing projects don’t have concrete deadlines, which is both a blessing (not having partners or clients breathing down my neck is amazingly liberating!) and a curse (it’s easy to let something that should take just a few hours drag on in drips and drabs for weeks).
While I’m grateful for the flexibility, I need a little structure in order to flourish, and setting deadlines for myself helps. Sometimes going a step further and communicating those expectations to your boss or client will really light a fire – that nagging law firm associate in me still cowers in fear of missing a deadline.
2. Establish office hours – A flexible job schedule has a sneaky way of making you think you can get your work done anytime. But there are always other tasks that jump to the top of the list if you let them – errands to run, appointments to schedule, laundry to fold – the list is endless. Scheduling specific working hours during the day, and being disciplined in keeping them, can keep that other non-urgent “life” stuff from chipping away at your productivity.
3. Enlist help – When my older two children made it to school age, I convinced myself that I didn’t need help with the baby – because I would just get my work done while he napped or after everyone was in bed (ha! – see #2). But I was completely at the mercy of this tiny human who demanded my full attention during his waking hours, whose sleeping hours were far too few.
Eventually I realized that I needed help, and my little guy now spends some time with a sitter a few days a week. When he’s there, I’m able to fully focus on the task at hand without constant interruptions. And when he’s home, I’m able to be a more attentive and less distracted parent.
4. It’s normal to feel disconnected – Because I only work part-time and from home, I can sometimes feel disconnected from my peers. It’s hard to fully relate to the stay-at-home moms or the full-time working moms – because I don’t fit neatly into either category. It’s a weird feeling, having one foot in each camp, but it’s one I’m slowly getting used to.
5. Never take it for granted – When Broc suggested I write a blog post about working part-time, I was both really excited to share my experience – but also a little nervous. I realize that I’m in a somewhat rare position of being able to continue pursuing my legal career while also having the flexibility to be home with my young children.
It’s not lost on me that the challenges I’ve faced with working part-time are ones I would have given my right arm for when I was working brutal hours at a firm – always on call, all the while learning how to be a new parent. Every once in a while, it’s important to take a step back and appreciate that meaningful and rewarding part-time work isn’t easy to come by – and to know a good thing when it comes your way.
Direct Listings: NYSE Files Revised Proposal!
That was fast. Earlier this week, I blogged that the SEC had rejected the NYSE’s proposed rule change to permit companies to sell newly issued primary shares via a direct listing – only 10 days after the exchange had submitted it. The SEC hasn’t made any public statements about why it rejected the proposal, so we still don’t know for sure whether it was because the Commission is fundamentally opposed to direct listings, believes that rulemaking is required, or if there was just something it wanted the NYSE to tweak. But the NYSE signaled that it would continue working on this initiative, and it’s now submitted this revised proposal. As this Davis Polk memo explains, it’s pretty similar to the original:
The new rule change proposal is substantially similar to the proposal the NYSE filed in November, except that issuers can meet the NYSE’s market value requirement by selling $100 million of shares (rather than $250 million under the initial proposal). Consistent with the initial proposal, the revised rule change proposal would provide the same flexibility for an issuer to sell newly issued primary shares into the opening auction in a direct listing, and would also delay the requirement that an issuer have 400 round lot holders at the time of listing until 90 trading days after the direct listing (subject to meeting certain conditions).
Stay tuned as to whether this revision addresses the SEC’s concerns. As Broc blogged when the original proposal was submitted, some are worried about investor protection issues for listings that occur outside of the traditional IPO process – but others note that there are a number of misconceptions about direct listings, including that a direct listing is even a “capital-raising” activity (see more from this Fenwick & West piece). We’re continuing to post memos in our “Direct Listings” Practice Area.
How to Attract & Retain New Lawyers
Law firms lose about $1 billion annually because of attrition, according to Thomson West. Being a young lawyer is marginally better than being a young investment banker (I have only landed in the hospital 2 or 3 times for overworking – I assume it’s a much more regular occurrence with bankers). But practicing law is still a tough gig.
And while my eyes usually glaze over whenever I see anything with “Millennial” in the title, this article connects some dots for scenarios that I’ve seen play out repeatedly. In the span of a couple years, our firm lost a cadre of young lawyers – not to other firms or companies – but to become distillery owners, grant-writers, ultimate Frisbee managers, MFA students… the list goes on.
Here are some pointers worth thinking about:
– A Millennial lawyer will leave a job, not just when he or she is unhappy, but when he or she is not happy enough.
– Give associates time & space to integrate their personal & professional lives (“work-life balance” is so Gen-X).
– Figure out a real way to mentor new lawyers.
– Empower associates to contribute immediately.
– Focus on “doing well by doing good.” The days of asking an associate, “If you can use the hours, I could really use your help on a new deal,” are over. Instead, try this approach: “If you’re interested in helping an interesting client, I’ve got a great deal for us.”
That last one made me laugh because that quote is specifically mentioned in Broc & John’s “101 Pro Tips – Career Advice for the Ages” (but not quite in the way that you’d think). One of the most empowering things you can do for these new lawyers is to help them take control of their own careers – and recognize the benefits of sticking with it. “Pro Tips” delves into the topics above and is a great resource for young lawyers – order it today. Here’s the “Table of Contents” so you can see what’s covered.
Programming Note: Lynn Jokela’s Blogging Debut!
Last month, I announced that Lynn Jokela has joined us as an Associate Editor for our sites. She brings a wealth of experience – here’s her bio. I’m now excited to share that Lynn will be making her blogging debut next week. Lynn’s email uses the domain from our parent company – it’s ljokela@ccrcorp.com – so keep an eye out for that in your inbox!
You likely saw this WSJ article last month, detailing an SEC investigation into one company’s end-of-quarter “earnings management” practices – e.g. leaning on customers to take early deliveries and rerouting products to book sales. The company says “everyone’s doing it” – and according to a McKinsey survey described in this Cleary blog, that’s not too much of an exaggeration:
Lest anyone think the SEC’s focus on “pulling in” revenues is an issue of limited relevance, note that approximately 27% of US public companies provide quarterly guidance, and evidence of widespread earnings management is not merely anecdotal. A broad survey by McKinsey reveals that, when facing a quarterly earnings miss, 61% of companies without a self-identified “long-term culture” would take some action to close the gap between guided and actual earnings, with 47% opting to “pull-in” sales. 71% of those companies would decrease discretionary spending (e.g., spending on R&D or advertising), 55% would delay starting a new project, even if some value would be sacrificed, and 34% would delay taking an accounting charge.
But the widespread nature of these practices doesn’t make the SEC more amenable to them – e.g. they imposed a $5.5 million fine and a cease-and-desist order in a recent enforcement action involving similar maneuvers. The blog notes:
The use of any of these techniques, if resulting in the obfuscation of a “known trend or uncertainty . . . that may have an unfavorable impact on net sales or revenues or income from continuing operations,” would presumably be equally objectionable to the SEC.
Accordingly, for those companies that are still providing earnings guidance, it would be prudent to make sure that your disclosure committee is having frank and frequent discussions with management about exactly what, if any, earnings management tools are being used, whether these tools fit squarely within the company’s revenue recognition policies, whether the company’s auditors are aware of the scope and persistence of these practices, and, most importantly, whether the use of the tools is, intentionally or not, masking a trend of declining sales, a declining market share, declining margins, or other significant uncertainties.
“Climate Accounting”: Exxon Prevails in Martin Act Suit
A couple months back, I blogged that Exxon Mobil was defending itself in New York state court against allegations that it had misled investors by saying publicly that it estimated higher future costs of climate change regulations when it evaluated potential oil & gas projects – when it was actually basing those decisions on current costs, and assumptions that the regulatory environment wouldn’t change.
Among other things, the complaint by the New York Attorney General alleged violations of the state’s Martin Act, which turns on whether there’s a misrepresentation or omission of material facts. The alleged misrepresentations were made by Exxon in reports that were published back in 2014 in exchange for the withdrawal of two shareholder proposals – and were then repeated in other reports such as the company’s “Corporate Citizenship Report.”
Earlier this week, the judge on the case issued this 55-page opinion in Exxon’s favor. Basically, the decision came down to a finding that investors didn’t care about the info – there was no market impact and the info wasn’t “material” when considered with the total mix available in the company’s 10-K and other disclosures. The judge also accepted Exxon’s argument that the company’s internal practices didn’t impact its financials.
This was a big victory, but it’s pretty fact-specific (as detailed in this “D&O Diary” blog) – and you’ve gotta wonder whether the outcome would be the same if the allegations were based on more recent disclosures, since current-day investors keep claiming they care about this stuff. Exxon continues to face other “climate change” lawsuits – including a consumer protection case in Massachusetts. And they aren’t alone. This Davis Polk blog notes that at least one D&O insurer is observing a growing number of climate-related claims – and that it will consider that risk during underwriting. Here’s an excerpt:
Among 28 countries, 75% of climate-related cases brought to date were in the United States alone. The firm anticipates that the failure to disclose climate change risks may drive claims in upcoming years. Moreover, a company’s lack of responsiveness to overall environmental, social and governance (ESG) issues, including ethical topics, can cause brand values to plummet. The insurer warns that, when gauging a company’s reputation, underwriters of D&O insurance will consider the nature and tone of comments made on social media relating to the company.
November-December Issue of “The Corporate Counsel”
We recently mailed the November-December issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
1. Hedging Disclosure Is Here—Are You Ready?
– Background of Hedging Disclosure Requirement
– What Item 407(i) of Regulation S-K Requires
– Applicability & Effective Dates
– Interpreting the New Hedging Disclosure Requirement
– Rule Applies to Broad Categories of Transactions
– Elaborate Policy Not Required
– Drafting Proxy Disclosure
– Evolution of the Staff’s Non-GAAP Comments
– What is “Tailored Accounting?”
– Where is the Staff Raising “Tailored Accounting” Comments?
– Comments On Acquisition-Related Adjustments
– Five Key Takeaways on Tailored Accounting
In response to investor pressure to issue an earnings release within the same time frame as prior years, the company announced its 2017 year-end financial results on March 8th and furnished its earnings release on Form 8-K. The company issued the earnings release despite the departure of senior finance and accounting managers, pervasive ERP implementation and internal control issues, and a seven-week delay in the filing of its third quarter 2017 Form 10-Q.
According to the SEC, the earnings release materially misstated, among other things, the company’s earnings for 2017.
On March 19th, the company filed a Form 8-K with the Commission disclosing that it expected its 2017 Financial Results to differ from what had been reported in the March 8th earnings release. The company’s shares declined over eight percent that day.
The company settled with the SEC for $250,000. The pain of dealing with an Enforcement action – and the loss of credibility – was likely an even greater punishment…
FCPA: DOJ Revises Policy to Encourage Self-Disclosures
A couple weeks ago, the DOJ revised its FCPA “Corporate Enforcement Policy” to encourage more self-disclosures to the Department. Here’s an excerpt from an O’Melveny memo that describes the change:
The DOJ eliminated language that appeared to require companies, in disclosing conduct, to characterize that conduct as a violation of criminal law. The DOJ also clarified that companies, when identifying information not in their possession, need only identify evidence actually known to the companies at the time. The changes respond to concerns raised by companies and the defense bar about language in the CEP, and reflect the current Administration’s push to make DOJ policy towards corporate enforcement more reasonable.
While the policy doesn’t apply to SEC Enforcement, the memo does note that the the DOJ’s Criminal Division has expanded the CEP beyond FCPA cases, and stated that it will act as non-binding guidance in Criminal Division cases involving healthcare, financial fraud, and other violations.
This Nixon Peabody memo blacklines the revisions – and explains they could be interpreted to encourage companies to share more information at an earlier stage of internal investigations in order to get full cooperation credit. We’re posting memos in our “FCPA” Practice Area as they come in…
California Consumer Privacy Act: FAQs
Ready or not, the CCPA takes effect January 1st. This memo from Womble Bond Dickinson lays out some “frequently asked questions” for companies that are trying to navigate compliance issues. Here’s one that could require some effort:
Question: Does the CCPA require changes to existing contracts?
Answer: If you are a business subject to the CCPA and do not want to be a data seller under the CCPA, then yes, you will need to amend contracts to add appropriate “service provider” language to the contract. If you are a service provider serving businesses subject to the CCPA, you can expect to receive requests from your customers described under the immediately preceding sentence. Also, where you yourself wear both hats, you may find you need to make both downstream and upstream changes to your agreements to comply with the CCPA.
Last week, the House passed the “Insider Trading Prohibition Act” by a vote of 410-13. John blogged about the bill back in June when it passed out of the House Financial Services Committee – it would broadly describe “wrongful” trading or communication of material non-public information by tying it to:
(A) theft, bribery, misrepresentation, or espionage (through electronic or other means);
(B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users;
(C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or
(D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, or a breach of any other personal or other relationship of trust and confidence.
The legislation would also require only that a defendant was aware or recklessly disregarded that the inside information was wrongfully obtained – rather than specific knowledge of how it was obtained or whether there was a “personal benefit” involved. It also leaves open the possibility that 10b5-1 transactions could be exempt from insider trading prosecution. Mostly, though, it pretty closely tracks current case law.
So what are the odds that this bill will become law? It appears to have “bipartisan” support – but it’s also been floating around in some form since 2015 and hasn’t made it to the finish line yet. The repetition certainly makes it easier to come up with headlines – I copied today’s from a 2017 write-up by John.
SEC Enforcement: “Cooperation” Becomes More Common
Last month, Broc blogged about the Enforcement Division’s annual report on its activities. This annual study from Cornerstone Research & NYU takes a closer look at the results for public companies & subsidiaries. Here’s some takeaways (also check out this Orrick blog saying that crypto & blockchain issues still appear to be enforcement priorities):
– While the number of enforcement actions rose more than 30% over the previous fiscal year, more than half of the new actions targeted investment advisers/investment companies or broker-dealers
– In FY 2019, the SEC noted cooperation by 76% of defendants, a record-high percentage and substantially higher than the FY 2010–FY 2018 average of 51%
– In the first half of FY 2019, the SEC brought 100% of enforcement actions as administrative proceedings; in the second half, this dropped to 84%
– Challenges to the constitutionality of protections preventing removal of the SEC’s administrative law judges (ALJs) continued in FY 2019 with a new defendant filing challenges following the August 2019 dismissal of Lucia v. SEC
– The average monetary settlement amount for public & subsidiary actions during the period was $16 million
When the SEC’s Enforcement Division released its annual stats last month, Broc blogged that some of the motivation behind the report might be for the SEC to show Congress that its money is going to good use. That hunch aligns with the recent recommendation by the Government Accountability Office that the SEC needs to do a better job of documenting its procedures for generating these reports – including procedures for compiling & verifying stats and documenting their implementation.
Since 2009, the Division of Enforcement (Enforcement) in the Securities and Exchange Commission (SEC) has made modifications to its reporting of enforcement statistics, including by releasing a stand-alone annual report beginning in fiscal year 2017. The Enforcement Annual Report included additional data on enforcement statistics not previously reported and narratives about enforcement priorities and cases. Enforcement staff told us the annual report was created to increase transparency and provide more information and deeper context than previous reporting had provided.
Enforcement has written procedures for recording and verifying enforcement-related data (including on investigations and enforcement actions) in its central database. However, Enforcement does not have written procedures for generating its public reports (currently, the annual report), including for compiling and verifying the enforcement statistics used in the report. To produce the report, Enforcement staff told GAO that staff and officials hold meetings in which they determine which areas and accomplishments to highlight (see figure). Enforcement was not able to provide documentation demonstrating that the process it currently uses to prepare and review the report was implemented as intended.
Developing written procedures for generating Enforcement’s public reports and documenting their implementation would provide greater assurance that reported information is reliable and accurate, which is important to maintaining the Division’s credibility and public confidence in its efforts.
